the plagues of China's internals
LGFVs
Yet again, a financial reminder of why China’s internal affairs consume the CCP’s attention. The Middle Kingdom has between $7 and 11 trillion (in dollars rather than renminbi) of off the books loans granted at the local level to occupy people with grandiose projects. That is a lot of any currency aimed at employing millions rather than allowing them to focus on the deteriorating climate where they live, the poorer economic prospects en lieu of prior stratospheric growth rates of the ~1978 through 2008 period, and the overall list of issues the leadership needed confront yesterday.
The crux of the problem, like so much, is the lack of transparency in a hierarchical political and cultural system. Add to that, the central government authorizing behavior by local officials but not enforcing a sustainable manner of curbing China’s inherent corruption and networking. Rest assured, at the Third Plenem of the Party meeting this week, Xi Jinping will invoke the necessary assertios about the Party meeting the needs of the people, remaining pure, and yadda yadda (in Mandarin since those foreigners seek to corrupt the country while looking to overthrow his beloved CCP) but that is fairy dust rather than addressing a crippling financial issue.
The debt will grow yet again next week, the year after, and into the future because the cadres just can’t stop themselves. Remember: Xi’s initial focus was on rooting out corruption yet he keeps having to declare a renewed campaign to do just that. Obviously, he is far from succeeding.
Poor visibility on decisions relating to both the huge projects being undertaken and the failure of the real estate market over the past few years is certainly a factor. China likes things BIG. That is not merely a CCP preference but part of the Middle Kingdom’s historic claim to be a uniquely successful culture over five thousand years. This nation is the home of the Three Gorges Dam, the largest project ever on the upper Yangtze River (So far, so good but concern about that enormous efforts persist for fear it could collapse or is causing geologic interference in the form of earthquakes).
On one hand, infrastructure projects need be large in the country because it has such as vast population challenging topography, and wants to provide both modernized services. Unfortunately, as the Journal points out, some of these schemes fail by not meeting promised outcomes or worse.
At least as important in this mess is the local government financing vehicles, LGFVs, which began struggling coincident with the Pandemic. These enterprises, almost invariably without sufficient monitoring or regulation despite a Party that increasingly watches its population’s every move, almost invariably have risky basics as they embark on new efforts. Reliant on selling real estate, in many cases, which was a satisfactory plan during the boom years, the LGFVs too often have insufficient capital and fall into two tremendous traps which further undermine their business models: they borrow from other similarly unstable entities and/or continue borrowing without means of repayment on the horizon. As China’s economy stopped growing so rapidly in an era of coincident hesitancy by (if not outright prohibitions on) foreign investors, these precarious ventures remain a significant drain on the economy when they fizzle.
Yet the General Secretary’s focus at the Third Plenum is on green technology where he intends China to lead the world. Perhaps it can but the future isn’t quite here yet and the LGFV and local problems need attention now. But to provide that scrutiny would require two steps Xi currently rejects: one, is to enforce genuine, sustainable reforms to the Chinese business practices (thus affecting CCP cadres) across sectors, and two, to acknowledge that the Party’s prior decisions were incorrect.
An insecure Party leader (remember: one cannot find Winnie the Pooh online there because it is considered humiliating for the ever more rotund Xi) who continues to accumulate questions about his judgment is not a happy ruler. Xi’s recent dismissal of the Strategic Forces leadership and cashiering of two former Defense Ministers cast doubt about his invincibility in leading the nation via the Party as do other day-to-day problems. Will this mean he has serious problems in the immediate weeks and months? Probably not but it is a drip drip drip as the nation’s economy slows and additional problems become clear under his rule.
We have a tendency to look for a uni-causal tipping point that will see the CCP fall. That is not likely to happen near term but the poor visibility on public policy debates cannot be comforting for those who live in the system. They may not want a western-style democracy but an enhanced standard of living is looking less inevitable than not so long ago so they will want to know why not.
China is a huge, complex place, as are we. Americans are no stranger to deep debt but we have accountability that makes it obvious, even if we choose to ignore resolving it at our long-term peril. China isn’t even willing to address its existence without lots of digging from outsiders such as the Wall Street Journal reporters. Even when confronted with the problem, the leadership in Zhongnanhai will take it on only when they can’t avoid the danger the issues raises. That is hardly the work of a regime confident of its complete power to rule into the never ending future, is it?
Actions definitely create consequences but they are rarely all good or all horrible. This falls into the same category as we shouldn’t assume China will do nothing as it addresses things it can’t avoid.
Thoughts are welcome by all. Two great WSJ.com pieces explain the importance better than I can so do look at them.
Please circulate this column if you find it of value, but thank you for reading it or any other. Thanks especially to the subscribers who support Actions with their financial investment. Please do chime in on this and any other topic.
The scorching heat continues through tomorrow night. I hope that is it for a while. How about where you are? The Eastport hollyhocks are happy, thankfully.
Be well and definitely be safe. FIN
Jason Douglas and Rebecca Feng, WSJ.com, 15 July 2024, retrieved at https://www.wsj.com/world/china/chinas-economy-is-in-trouble-xi-jinping-has-other-priorities-c1933b34?mod=world_lead_story
Brian Spegele and Rebecca Feng, WSJ.com, 14 July 2024, retrieved at https://www.wsj.com/world/china/china-economy-debt-borrowing-33f08b5e?mod=world_lead_pos4